Legal Blog

Arbitration (3)

Arbitration clauses are becoming more and more prevalent. Unless changed by supplementary conditions, they are incorporated into every CCDC contract. Can a party simply ignore an arbitration clause and proceed with litigation in court to deal with a claim? If one party does this, can the other party, at any time, have the action stayed because the issues should be decided by arbitration? These questions were dealt with in Bombino v. Serendipity Homes, a 2022 decision of the Ontario Superior Court of Justice.

Dispute

The dispute between the parties related to a residential home project and alleged deficiencies. The contract between the parties contained a relatively wide arbitration clause. In essence, all disputes relating to the interpretation, application, or administration of the contract were to be determined by arbitration. Notwithstanding this clause, the owners commenced an action in court against the contractor.

After pleadings and affidavits of documents were exchanged, but before oral discoveries, the contractor brought a motion to either dismiss or stay the action. For purposes of dismissal, it claimed that the action had been brought too late because the limitation period had expired. If the action were not dismissed, it claimed that the action ought not to have been commenced because of the mandatory arbitration clause and, therefore, should be stayed.

Limitation

The contract called for substantial performance by March 6, 2015. The owners commenced their action on March 3, 2017.

The owners admitted that by February 5, 2015, they knew that the house would not be substantially completed on or before March 6, 2015. The contractor, therefore, argued that because the owners had a cause of action based on the contractor’s anticipatory breach of contract, the limitation period began to run on February 5, 2015.

The judge noted that an anticipatory breach of contract does not trigger a limitation period. Anticipatory breach allows the innocent party two courses of action: declare the contract at an end and sue or affirm the contract and expect the other party to perform it. How can a limitation period start to run if the innocent party has not terminated the contract? Accordingly, the earliest the limitation period could have started to run was March 6, 2015 and the action was commenced within two years of that date.

However, the judge went further. The contractor had been actively attempting to fix the deficiencies through to December 2016. While the contractor was doing so, it would not have been “appropriate”, for purposes of the Limitations Act, 2002, for the owners to commence an action or arbitration. They were reasonably relying on the superior knowledge and expertise of the contractor. It was not until December 9, 2016, when the relationship irreconcilably broke down, that litigation or arbitration became a reasonable means to resolve the dispute.

Mandatory or Not

Section 7(1) of the Arbitration Act states that if a party to an arbitration agreement commences a proceeding, a court, on motion of another party to the agreement, shall stay that proceeding.

Although this section is mandatory, it is subject to section 7(2), which lists the circumstances in which the court has discretion to refuse to stay the preceding:

• A party entered into the arbitration agreement while under a legal incapacity.
• The arbitration agreement is invalid.
• The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
• The motion was brought with undue delay.
• The matter is a proper one for default or summary judgment.

The usual issue in a motion to stay a proceeding is whether the motion was brought without undue delay. Undue delay will invariably prejudice the party who brought the proceeding – albeit improperly. The longer the litigation proceeds, the more money is spent in prosecuting and defending the action. Further, and possibly more importantly, the longer the litigation proceeds, the less likely the plaintiff will be able to commence arbitration proceedings – because the limitation period will have passed.

Timing is Everything

The contractor most certainly delayed in bringing its motion. The question was whether it was an undue delay. The timing was as follows:

Mar. 3, 2017

• notice of action issued

Mar. 31, 2017

• owner files statement of claim

May 23, 2017

• owner serves notice of action and statement of claim on contractor

Feb 26, 2019

• contractor delivers its statement of defence and counterclaim and a jury notice

November 26, 2019

• contractor obtains an order upon motion for leave to commence third party claims against 11 subcontractors.

Early 2021

• parties exchange draft affidavits of documents

May 18, 2021

• contractor brings its motion to dismiss or stay

Nothing was done between May 23, 2017 and February 26, 2019 because the owners consented to the contractor’s request that it not be called upon to deliver a statement of defence at that time. Keep in mind that the judge had held that the limitation period commenced December 9, 2016 and therefore would terminate two years later, which, coincidentally or not, just happened to fall within the period that the contractor delayed in delivering its statement of defence.

Tactical

The judge held that the contractor’s delay was undue for two reasons:

1. The contractor attorned to the jurisdiction of the court. It delivered its statement of defence, delivered its third party claims, and delivered its draft affidavit of documents. The judge also noted the contractor saw fit to join subcontractors in the action claiming contribution and indemnity. As the judge put it, quoting another judge, the contractor “has ridden the litigation horse too far down the path to justify a rerouting to an arbitration process.”

2. The judge decided that the only reason why the contractor requested a delay in delivering its statement of defence was to allow the limitation period for commencing an arbitration to expire. This was a tactical decision and it would be unfair for the contractor to lull the owners into complacency and later to pounce on them for that complacency.

Result

The judge dismissed the motion both as to the contractor’s request for a dismissal of the action for limitation purposes and for a stay of the action in favour of arbitration. The action and all of its third party claims were to continue in the normal course and arbitration was no longer an alternative.

 

Image courtesy of ZeeChow.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.